No matter how much money you have coming in, taxes are a burden and, frankly, a drag. If you're looking to lower your taxes this year, here are a few strategies you can employ.
1. Contribute to a retirement plan
Imagine being able to exclude $18,000 of your income from taxes. Max out your 401(k), and you'll get to do just that. The current limits allow workers under 50 to put up to $18,000 of pre-tax dollars into a 401(k), and if you're 50 or older, that limit increases to $24,000. Don't have access to a 401(k)? You can fund an IRA instead and reap a similar benefit. Workers under 50 get to contribute $5,500 a year, while those 50 and older are allowed to put in $6,500 -- and the more you stick in either type of account, the more of a tax break you'll get. As an example, if you're 40 years old with an effective tax rate of 25% and you max out your 401(k), you'll shave $4,500 off your taxes -- all for building your retirement nest egg.
2. Use pre-tax dollars to pay for your commuting and healthcare costs
Healthcare and commuting are unavoidable expenses for most of us, but if you use pre-tax dollars to pay for both, you'll snag some tax savings in the process. Current workers can contribute up to $2,600 a year to a flexible spending account (FSA), and if you expect to rack up that much in medical bills, it pays to max out. Just be careful not to overfund your FSA, because once that money is in your account, you need to either use it or forfeit your balance.
Furthermore, if you sign up for commuter benefits through your employer, you can use up to $255 pre-tax dollars per month to pay for transit, and another $255 per month to pay for parking. Best of all, you can double up on these two benefits, so if you currently spend $200 a month on a rail pass and $150 a month to park at the train station, you can pay for your entire commute with pre-tax money.
3. Get a tax break for child care
The average American family spends over $10,000 a year on full-time day care, while the typical household that uses a full-time nanny spends almost three times as much. The good news, however, is that there are tax breaks available for those who pay for child care. First, if you sign up for a dependent care FSA, you can allocate up to $5,000 each year in pre-tax dollars to pay for child care costs. (If you're married but file separately, this benefit is slashed in half.) In addition, as long as you meet the criteria for eligibility, you can claim the Child and Dependent Care Credit and get a dollar-for-dollar reduction of your tax liability. Under this credit, lower earners can get up to $2,100 in tax benefits, while higher earners can snag up to $1,200.
4. Know your homeowner deductions
Though owning a home can be an expensive prospect, it could also shave thousands of dollars off your tax bill. Many homeowners benefit the most from the mortgage interest deduction, which allows you to write off the interest portion of your home loan payments provided you haven't borrowed more than $500,000 as a single tax filer, or $1 million as a couple filing jointly.
You're also allowed to deduct points on your mortgage as well as your property taxes, which, in some parts of the country, can well exceed what you pay in mortgage interest. Finally, if you're stuck paying private mortgage insurance (PMI) as a result of not having put 20% down on your home, you can deduct your monthly premiums as long as you don't earn too much money. The PMI deduction isn't available to single homeowners who earn more than $54,000, or $109,000 for couples.
5. Make a move
If you've been toying with the idea of moving elsewhere, pulling the trigger this year could lower your tax bill if you relocate in conjunction with getting a new job. If the distance between your old home and your new job is at least 50 miles greater than your previous commute, and if you work at that job for at least 39 out of 52 weeks following your move, you'll be eligible to deduct the costs associated with your relocation. These include hiring movers, transporting your belongings, and paying for storage.
We all want to keep more of our money away from the IRS. Follow these tips, and you could be well on your way to cutting that pesky tax bill.